The Economics of Gasoline

Thirty-six percent of the energy consumed in the United States comes from petroleum. Gasoline is produced year-round and more is usually produced during the summer months when demand is higher.

About 157,393 retail gas stations across the United States supplied commercial-grade gasoline in 2011. There are three main grades, with different octane levels. They are regular, mid-grade and premium. Although pricing varies by grade, the price difference between grades generally remains consistent.

What components contribute to the retail price of gasoline?

The cost of crude oil, refinery processing costs, marketing and distribution, retail station costs and taxes all contribute to the price at the pump.

Crude oil accounts for 64 percent of the cost of a gallon of gas.

The cost of transporting gasoline from the refineries to the distribution centers, and then gas stations, is also reflected in the price at the pump.

Marketing of the oil company's brand is also included. Both of these factors account for roughly 7 percent of the gasoline price.

Federal excise taxes are 18.4 cents per gallon, and state excise taxes average 35.3 cents per gallon. Applicable state sales taxes, gross receipts taxes, oil inspection fees, underground storage tank fees and other miscellaneous environmental fees are also added. When all that is totaled, the average increases to 49.3 cents.

Some of the money spent at the pump goes to the gas station itself, which adds a few cents to the cost per gallon. While there is no set amount for how much can be added on to the price, some states have markup laws barring stations from charging less than a certain percentage over invoice. These laws were set up to protect individually owned gas stations from being run out of business by bigger chains that can afford to cut prices at certain locations.

Most of the time, the difference in price at local stations comes from operating costs. Stations have varying traffic patterns, rents and supply sources that inevitably influence the price.

Why are gasoline prices higher in California?

California has a reformulated gasoline program with stricter requirements than federally mandated clean gasoline. In addition to the higher cost of cleaner fuel, there is a combined state and local sales and use tax on top of a 18.4 cent-per-gallon federal excise tax and a 35.3 cent-per-gallon state excise tax.

California requires a unique blend of gasoline, which only a few sources outside the state can supply. Therefore, the state's refineries must run near full capacity to meet fuel demands. If more than one but the farther away the relief supplies are, the higher and longer the price spike will be.

The OPEC factor

The price of crude is determined by worldwide supply and demand. It is also significantly influenced by the Organization of Petroleum Exporting Countries, whose members account for 40 percent of the world's production of crude oil and hold more than two-thirds of the world's estimated crude oil reserves. Since being formed in 1960, its goal has been to keep global oil costs at its target level by setting an upper production limit on its members.

There are three categories of membership: founder member, full member and associate member.

Founder members are those countries that were represented at the first conference, held in Baghdad, and signed the original agreement establishing OPEC.

Full members are founder members and those countries whose applications for membership have been accepted by the conference.

Associate members are countries that do not qualify for full membership, but are admitted under special circumstances determined by the conference.

Can domestic and world events impact gasoline prices?

Rapid hikes in gasoline prices can occur as a reaction to dramatic events both foreign and domestic. For example, in 2005 Hurricane Katrina had a devastating impact on U.S. gasoline markets by initially taking out more than 25 percent of U.S. crude oil production and 10-15 percent of U.S. refinery capacity. The chart below illustrates the impact of historical events on yearly average California gasoline prices per gallon. Figures are based on 2012 dollars, peak price adjusted for inflation.